BREIT investors should be comforted by UC Investments’ arrival

When Blackstone and UC Investments announced the US endowment’s $4 billion equity infusion into the manager’s biggest real estate fund on Tuesday, they did so as the vehicle still was experiencing net outflows from investors.

Since December, BREIT, a major contributor to Blackstone’s bottom line, has been reporting redemption requests exceeding its prescribed monthly limits. As a consequence, the New York-based sector giant has found itself in the unusual position of defending one of its strategies.

Then, unsolicited, UC Investments, the steward of the University of California’s $152 billion endowment, makes an equally unusual move by approaching the firm with a proposition. Blackstone is used to structuring transactions on behalf of its funds. It is not used to entertaining proposals to structure commitments to one of its own vehicles.

But, in a two-pronged deal, the manager and the endowment have agreed the latter acquires $4 billion of its common shares at a current valuation, paying full fees, on the basis the capital is locked up for six years. Concurrently, Blackstone has agreed to underwrite a minimum 11.25 percent annualized net return for the same period with a commitment of $1 billion of shares it owns in BREIT. Blackstone also negotiated a performance bonus equivalent to 5 percent carried interest on UC Investment’s return, if BREIT’s annualized net return exceeds the 11.25 percent. Ultimately, the firm is expected to achieve an incremental profit as long as BREIT produces in excess of 8.7 percent a year, when fees receivable from commitment are taken into account.

One person we spoke to familiar with the situation told us how the investment by UC Investments “has changed the narrative” about the vehicle. By their reckoning, a commitment of such scale from a sophisticated institutional investor is validation of BREIT’s portfolio and Blackstone’s strategy. Besides the lock-up and performance arrangements, Blackstone has been given full discretion with the money, which bolsters its coffers to approximately $14 billion of liquidity, equal to about 20 percent of BREIT’s net asset value.

It is hard to argue against this being anything other than an endorsement by UC Investments, even if Blackstone has become the subject of an opportunistic move, rather than the instigator, as it is usually.

So far, the firm’s shareholders appear to like the introduction of UC Investments to BREIT’s 200,000-strong mix of high-net-worth investors, which average $100,000 a commitment to the vehicle. Blackstone shares traded at $77.10 as of yesterday morning CET, up about 3.7 percent on Tuesday’s price, when the announcement of the investment was made. That claws back some of the 17 percent drop from the level they traded when the news of the fund’s net redemption position first emerged.

Another important litmus test will be a reversal of redemption requests from BREIT investors. In December, the fund had received requests equivalent to 5.44 percent of NAV, following net redemption requests leading back to October. Those investors would have been blind to UC Investments plans for a $4 billion commitment.

They have full sight of it now. It will be impossible to quantitively know the impact of the endowment’s investment and many of the individual investors which redeemed did so for reasons unrelated to Blackstone or BREIT. But those investors should still take comfort seeing a sophisticated investor do due diligence on the vehicle and decide to join them. Whether they do will be apparent after the next few months’ of redemption requests are revealed.

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